How Leasing New or Used Equipment Can Lower Your Tax Liability
Unless your accountant just told you something like, “Before the end of the year, buy some equipment you need and we can reduce your tax liability,” the relationship between tax planning and equipment leasing has probably never even crossed your mind. Don’t worry you’re not alone.
The good news is that there are two deductions that are worth exploring. A little advance planning on your part will make it very easy to do.
Over my more than 30 years in equipment leasing, I can’t remember a year when I haven’t received several calls at year-end to finance equipment for business owners searching for write offs. One year, I got that call on December 31st!
We pride ourselves on a quick-turnaround, but the last day of the year, even the last week, is just too late. Preparing to reduce your tax liability really does take planning. And you want to execute the plan before the last day of the year, at least a month or two. You want to have the time to choose the equipment, negotiate the best price, and arrange for delivery. If you finance the purchase, you need time to submit your paperwork and get an approval.
The Tax Benefits of Leasing
There are two strategies that many of my clients have been able to use effectively:
1. Expense the entire cost of the equipment under Section 179 of the Internal Revenue Code
2. Bonus Depreciation
Here’s how they each work:
1. Section 179
Any equipment that you acquire for business use in the current tax year and put into service in the same year, is eligible for you to expense the cost of the equipment 100% up to a maximum amount of $500,000. This applies to both new and used equipment. This is why you need to time to get it delivered, installed, and up and running before the end of the year.
Using Section 179 with an Equipment Lease or Equipment Finance Agreement could be the most profitable decision you make this year. That’s because the amount you deduct will almost always exceed your cash outlay for the year. An Equipment Lease with a $1.00 end of term option as well as an Equipment Finance Agreement are both considered contracts for the purchase of equipment. That’s why you become the owner of the equipment as soon as it’s delivered and why you’re entitled to take the depreciation.
Here is a practical example of how Section 179 works. In this example the equipment cost is $50,000 and let’s assume that you’re in the 35% tax bracket.
Equipment Cost $50,000
35% tax reduction due to Section 179 -17,500
Net Cost $37,500
Coupled with an Equipment Lease or Finance Agreement, which generally only requires the first and last payment in advance, there’s very little upfront cost for you to acquire the equipment. Depending upon when you close the transaction in the last months of the year and the number of payments you make before year-end, you may only spend 3 to 6% of the equipment cost to get a 35% tax savings.
There are some other rules to keep in mind. For example, the Section 179 deduction is limited to the first $2,000,000 in equipment purchases and then it slowly phases out. As with all tax planning, the smart move is to consult your tax professional.
2. Bonus Depreciation
Businesses are allowed to depreciate the cost of capital expenditures over time. Congress has allowed businesses to more rapidly deduct capital expenditures of most new equipment by permitting an additional first-year write-off of the cost by using bonus depreciation.
The bonus depreciation percentage is 50 percent for the remainder of 2017. The amount you can write off will decrease each year thereafter. Generally, to qualify for bonus depreciation, the equipment must be (1) depreciable with a recovery period of 20 years or less; (2) water utility property; (3) computer software; or (4) qualified improvement property. Also, the original use of the equipment must begin with the taxpayer; used equipment doesn’t qualify.
WARNING, you probably can’t use both Section 179 depreciation and bonus depreciation together. It’s best to use one or the other unless you have extraordinarily large amounts of depreciation deductions. Play it smart and consult with your tax advisor, first.
In addition to the tax benefits of equipment leasing, there are several other benefits that are also important to our clients:
1. Leasing conserves your capital.
2. Leasing preserves your bank line of credit.
3. It is easier to qualify for an equipment lease than for most bank loans.
4. Lease payments, generally, are not reported on your personal credit bureau (the credit inquiries are, but the actual borrowing is not).
A properly structured Equipment Lease or Finance Agreement with a full Section 179 deduction or Bonus Depreciation is a bottom-line increasing strategy you can use. Now is the time to start planning for it and get the process started.
Jim Phelps is the owner of Capital Equipment Leasing. He and his staff serve clients throughout the continental United States. Clients choose their vendors, select their equipment, make their best deal, and take advantage of the benefits equipment leasing allows. They can finance purchases from $5,000 to $5,000,000.
You can reach Jim at 503-890-0969, or download an application at www.LeasingDollars.com